Rachel Reeves, Chancellor of the Exchequer, is bracing for a formidable test in 2025 as she prepares a multi-year spending review against the backdrop of stagnating economic growth.
Carl Emmerson, deputy director of the Institute for Fiscal Studies (IFS) described the task as a “very big challenge” given the UK’s economic struggles.
The spending review, expected to be published in June 2025, will require government departments to find “efficiency savings” of 5% in their budgets. This comes as the economy contracted by 0.1% in September and October, marking the first consecutive monthly decline since the onset of the COVID-19 pandemic in 2020.
The latest figures also revealed zero growth from July to September, coupled with falling living standards.
Economic forecasts paint a challenging picture. The Office for Budget Responsibility (OBR) projects GDP growth of 2% in 2025, but independent forecasters compiled by the Treasury predict an average of just 1.3%. This discrepancy could strain public finances due to lower tax revenues and increased costs.
Emmerson commended Reeves’ focus on investment, noting its potential for long-term economic benefits, but warned of the immediate risks tied to lackluster growth. “The outlook is uncertain,” he said.
“She might get lucky. It’s possible growth will exceed the OBR’s forecast, things could go very well. But, equally, she could get unlucky. And I guess we don’t have much of a sense of what she would do.”
Carl Emmerson
Emmerson raised concerns about the Chancellor’s limited fiscal flexibility, pointing out that Reeves has “not given herself huge wiggle room against her fiscal targets.” He added, “From April 2026 onwards, the spending plans look pretty tight.”
Reeves has emphasized that her economic strategy prioritizes growth and investment over additional tax hikes. However, Emmerson noted the difficulty of maintaining this approach if growth underperforms. “If she got unlucky, where would that leave their commitment to be delivering growth? Not very well,” he remarked.
Competing Needs Add Pressure
The upcoming spending review will be crucial in determining the government’s ability to balance competing demands for public funding. Emmerson acknowledged the challenge, saying, “You’ve got so many competing needs for more spending.”
He highlighted areas where recent expenditures have been significant but not necessarily growth-focused, such as the NHS, climate initiatives, and justice. “You can make the case for that spending,” Emmerson said, “but I don’t think it’s the most obvious area of spending if you’re only worrying about growth.”
Labour leader Sir Keir Starmer has emphasized the need for citizens to feel the benefits of economic growth, rather than focusing solely on GDP figures. He has called for policies that translate into tangible improvements in living standards.
The Resolution Foundation, a leading think tank, has presented a mixed analysis of the government’s plans. Mike Brewer, its interim chief executive, explained that the Chancellor’s strategy relies on a “budget tax-rise gamble” aimed at improving public services.
“While people may not be better off in purely financial terms, they will feel better off if we can have better, less dysfunctional public services,” Brewer said.
The think tank’s analysis of “real living standards” suggests that low-to-middle-income families could benefit the most when considering disposable income alongside the “benefits-in-kind” derived from public services.
Meanwhile, the Bank of England forecasts zero GDP growth between October and December, further underscoring the daunting task Reeves faces in steering the economy towards sustained recovery.
The stakes are high for both Reeves and the Labour government as they work to balance fiscal responsibility with public expectations. How the Chancellor navigates this period could define her tenure and Labour’s broader economic credibility in the eyes of voters.
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